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Este informe no está disponible en español. CARIBBEAN BUSINESS Can Puerto Rico Taxpayers Continue To Carry Big Government? Lean government and private sector-led development By ELISABETH ROMAN February 17, 2005 The keys to economic success in the 21st century As the administration of Gov. Aníbal Acevedo Vilá struggles to deal with a $1 billion deficit and managing approximately 320,000 employees, an economy in which one out of every three salaried employees works for the government, the call for fiscal reform is becoming louder throughout Puerto Rico. The Commonwealth’s fiscal crisis is generating great concern among the private sector and business associations that unless the government reduces its size and scope, taxpayers won’t be able to continue financing the public sector nor will Puerto Rico be able to generate adequate growth in the future, severely impacting the island’s ability to compete in the global economy. Unless something is done now to bring the Commonwealth’s fiscal crisis under control, Puerto Rico’s taxpayers will continue to face higher taxes for decades to come while receiving fewer and lower-quality services from the government. The Commonwealth currently spends 72% of its budget on operational expenses, while 13% goes to servicing the government’s debt, leaving just 15% for capital improvements and services. Is it any wonder thousands of families have left Puerto Rico and continue to leave every week? There are now more than one million Puerto Ricans residing in the States than are living in Puerto Rico. In Puerto Rico, the government structure is anchoring the local economy in stagnation and preventing the healthy development of the island’s economy, according to José F. Méndez, president of the Ana G. Méndez University System. "Our government structure doesn’t respond to today’s Puerto Rico, nor to the Puerto Rico we want to develop tomorrow," explained Méndez, adding, "When you see that in Florida there are 14 government agencies for 17 million inhabitants, and in Puerto Rico there are 130 agencies for a population of 4 million, you know something is wrong." Ana G. Méndez University System (Agmus), one of Puerto Rico’s leading institutions of higher learning, commissioned an economic development study that examined the restructuring process of the state governments in Florida and North Carolina and how this has led to economic growth and low unemployment. The study, sponsored by the Institute of Public Policy at Agmus and prepared by the Florida-based Washington Economics Group Inc. (WEG), examines the impact of a global marketplace and the changes in the flow of capital, technology, and in the economic progress of nations, states, and regions. Entitled "A Comparative Analysis of Government Restructuring & Economic Development Strategies in Florida & North Carolina: Implications for the Commonwealth of Puerto Rico," the study was prepared by Dr. J. Antonio Villamil, chief executive officer of WEG, former undersecretary for the U.S. Department of Commerce, and recently director for Tourism, Trade & Economic Development of Florida. Governments must face global challenges Changes in the global marketplace and economic trends are impacting the way governments worldwide are organizing their administrative functions and public policies. Access to new markets, free trade agreements, and low-cost labor and resources in developing countries are creating greater pressures on developed economies to compete. These challenges are also having an effect on the way governments deliver public services and contribute to economic growth in their nations or states. The WEG study finds one of the key challenges governments must solve is the ability to provide a climate conducive to private sector-led economic development, where the public sector becomes a "facilitator" of private investment and growth as opposed to a "direct generator" of employment and economic activity. The study also points out that the first thing that has to be achieved in order to fulfill these goals is to arrive at a consensus on the role of the public sector and to identify the priorities for economic development. "We aren’t only going to say what has to be done, but how to do it," said Méndez. "It’s important to point out that the findings that result from this report have to be adapted to the particular circumstances of the island. Puerto Rico has key advantages that will assist in the process of economic development, such as the full integration with the U.S. mainland economy, an educated workforce, and an excellent infrastructure relative to its Caribbean Basin competitors. However, these advantages can lose value if they aren’t properly channeled, and Puerto Rico needs to focus on the future growth of its knowledge-based economy and on services in order to survive in the global reality of the economy of the 21st century." Fundamental changes in the global economy are affecting the flow of capital, human resources, and advanced technologies to nations and states worldwide, according to WEG. This requires government structures to become more flexible and streamlined. Through the creation of innovative economic strategies, the public sector can also provide support to private sector-led economic development. Among the most important policy changes in an era of globalization is that government institutions must begin acting as "facilitators" and not as the "direct generators" of economic opportunity and employment. Regulatory compliance burdens that are time-sensitive, hierarchical organizations, centralized labor departments, the government’s monopoly of workforce and economic development, and an expanding public sector are all outdated public administration strategies that are being discarded in the new global economy. The WEG study recommends the public sector create a new model of public administration based on "best practices." These best practices include streamlined public organizational structures for delivering public goods and services; performance-based educational models; public and private partnerships to deliver workforce training and economic development services; online public services such as business permits; smart intermodal and multimodal transportation systems that can deliver goods and services to the market; and zero-based budgeting where government budgets are tied to performance. In addition, to succeed in the development process, government, academic, and business leaders must work as partners with a great level of trust between them. Full accountability and transparency in public contracts with the private sector must also exist. Florida-North Carolina models Florida and North Carolina have become successful models of government restructuring strategies based on global economics and these "best practices" of public administration. The states were selected because they ranked high in such performance measures as fiscal management, economic growth, and business vitality. "What we have done in Florida is streamline state government and give more power to local government and municipalities. The way we have done this is by privatizing some of the activity that is usually centralized in state government," Villamil explained. Florida has pursued a greater degree of governmental restructuring than North Carolina, according to Villamil. This is due to the more diversified regional economic structure of Florida and its much larger economy and geographical size than North Carolina. Although they differ in their level of government restructuring, both the Florida and North Carolina experiences suggest a similar number of principles that can be applied to Puerto Rico and create potential changes and economic growth. In Florida, it was Project Cornerstone, led by the statewide Florida Chamber of Commerce, which started the debate and movement toward consensus; and in North Carolina, it was Research Triangle, supported by the state’s top universities and the public and private sector that initiated strong synergy among the sectors. Both initiatives ignited the necessary negotiations that eventually led to reform. Méndez believes that in this respect, Puerto Rico is already moving in the right direction. However, still more needs to be done. "I think this is already happening in Puerto Rico; there is beginning to be a consensus between the platforms of the two political parties," Méndez said. The WEG study also stresses the leadership of the governor as a necessary catalyst for the process. In both model states, it was the governors and their immediate offices that led the changes. The role of the academic community was also vital in the restructuring of both states. The debate that initiated the process of change was born in universities and then seized by legislators and the private sector. Méndez, who is already providing the necessary debate platform on the subject, emphasizes that another important factor for the island’s development is the restructuring and decentralization of the educational system, as well as making sure the University of Puerto Rico is fulfilling its role in society to the best of its ability and properly taking advantage of the state funds it receives. Private-public partnerships are needed The collaboration of the private and public sectors was an important component in the restructuring of the state governments in Florida and North Carolina. Public and private organizations and boards, which in some cases reported directly to the governor, hugely facilitated and fostered the economic development process. Privatization was also identified as a vital engine for growth. While privatization may have some negative connotations in Puerto Rico, Florida has used various techniques of privatization, including contracting out, outsourcing, and public- and private-sector partnerships, to reduce the size of the state’s government. "Puerto Rico has to head toward identifying antiquated government agencies that are inefficient and unproductive, and privatize them so they can be more efficient and productive," explained Méndez of Agmus. The university president specifically singled out the Economic Development Administration, the Puerto Rico Planning Board, and the Regulations & Permits Administration as candidates for decentralization, at the very least, explaining the delegation of processes and issuing of permits to municipalities or smaller autonomous offices could provide the efficiency and productivity that all three organisms are currently lacking. How does Puerto Rico measure up to Florida and North Carolina? While employment in the government of Puerto Rico has increased by over 42,700 salaried employees between 2001 and 2004, the states of Florida and North Carolina have been streamlining their public sector and creating more jobs in the private sector. Reduction of the public sector, privatization of services, and the restructuring of government agencies has led to substantial economic development and a decreased fiscal burden on residents in these two states, according to the WEG. Thanks to changes in the structure of their public sectors, Florida and North Carolina have reported above average economic development compared to the U.S. mainland and a substantially higher growth than Puerto Rico’s. Between 1991 and 2001, the average yearly economic growth in Florida and North Carolina was 5.6% and 6.8%, respectively. During this same 10-year period, the average annual economic growth in Puerto Rico was 4.3%. Government restructuring has also led to decreasing the fiscal burden on state residents. The restructuring was carried out through a deliberate policy–built on public debate and consensus–of streamlining centralized bureaucracies and outsourcing some public services. This, combined with the creation of highly innovative public-private partnerships for tourism, economic development, and workforce training, among others, has led to economic growth and low unemployment levels in Florida and North Carolina. Productivity levels have also increased in these states. For example, in 1997 one state government employee served 78 residents in Florida. By 2002, the figure had increased to 86 residents per state employee, increasing productivity noticeably in the sunshine state. In North Carolina, 59 residents were served per state employee in 2002, compared to a mere 13 in Puerto Rico, far below both states. The increase in productivity in Florida and North Carolina has also allowed for the shifting of scarce resources to priority areas such as education and workforce training, while maintaining one of the lowest tax burdens for residents of states in the nation. In 1997, Florida privatized its Commerce Department and significantly reduced the size and scope of its Labor Department during 2003. North Carolina chose to restructure its public administration by providing a greater role to the private sector through well-structured advisory boards, but kept its Commerce and Labor departments at the state levels. These reductions in the size of government haven’t led to increased unemployment. On the contrary, unemployment remains low and jobs continue to grow. In fact, Florida led the nation in employment growth in the 16 months leading up to December 2003, creating 116,000 new jobs. By comparison, Puerto Rico’s private-sector employment has declined from 775,300 salaried employees in 2001 to 724,500 by December 2004, a drop of almost 51,000 jobs in the private sector. "There are a lot of public / private partnerships in Florida, where there used to be the Department of Commerce. As a result, we have seen rapid growth of the economy throughout the state, which now has one of the lowest unemployment rates in the nation," said Villamil of WEG. The yearly rate of growth in private-sector employment in Florida reached 2.6% and in North Carolina 2.0%, while in Puerto Rico the rate was 1.7%. In 2000, the unemployment rate was over 10% on the island compared to 3.6% in Florida and North Carolina. The unemployment rates in both North Carolina and Florida were among the lowest of the all states in the nation in 2000. According to WEG, business vitality and business climate are also impacted by public administration strategies and policies. The restructuring of the public sectors in Florida and North Carolina has successfully contributed to creating an economic and business climate that has been able to meet the challenges of the competitive global economy. This has led to the creation of new business and substantial venture-capital investment. In 2001, new business start-ups in Puerto Rico added up to 4,834 compared to 22,950 in North Carolina and 72,720 in Florida. In addition, venture capital investment in Puerto Rico was $300 million in 2000 compared to $1.8 billion and $2.2 billion in North Carolina and Florida, respectively, according to a PricewaterhouseCoopers survey. Florida and North Carolina also rank above average in fiscal performance as measured by ratios of state creditworthiness, effectiveness of public management, and control over public spending, according to the CATO Institute Report and Syracuse University. The WEG analysis also suggests that Puerto Rico has significant potential for steady improvements in public administration by restructuring to increase the productivity of the government sector. Currently, one out of every three salaried employees in Puerto Rico is employed by the government. The huge government bureaucracy is generating substantial deficits in the commonwealth’s budget, a figure that is projected to surpass $1 billion by the end of fiscal 2005, which ends June 30. Gov. Acevedo Vilá, however, has rejected any measure to balance the budget that includes a reduction in government employees. How did Florida do it? By restructuring its state government and implementing innovative economic development strategies, Florida has become a textbook model of successfully shifting public services to the private sector and generating economic growth, according to the study prepared by the WEG. The government’s restructuring process, which began during the administration of the late Gov. Lawton Chiles in the early 1990s and was accelerated after Gov. Jeb Bush took office in January 1999, occurred in various phases and was developed through a consensus among Florida’s public, private, and educational leaders. While privatization may have some negative connotations in Puerto Rico, Florida has used various techniques of privatization, including contracting out, outsourcing, and public-private partnerships to reduce the size of the state’s government. The eliminations of state agencies such as the Department of Commerce and downsizing of the Labor Department are examples of the government restructuring carried out in Florida, which has generated significant fiscal savings. Furthermore, the state government continues to review agency activities on an ongoing basis to identify areas that can be privatized or contracted out to the private sector. Currently about one-third of the state’s appropriations of $21 billion is spent on acquiring services under different forms of privatization. In addition to fiscal savings, the privatization of certain services also contributes to maintaining an attractive business climate by keeping taxes relatively low. By the end of 2003, Florida had the second lowest state and local taxes as a percentage of Personal Income (PI) of the 12 largest states on the mainland (9.2% of PI). Full-time employment in the state government decreased from a peak of 155,000 positions in 1999 to 150,000 in 2002, the last year for which figures are available. This is a reduction of 5,000 state employees even though Florida’s population grew by one million during the same period. With a population of 17 million people, according to 2003 Census figures, more than four times the population of Puerto Rico, Florida’s state government has less than half as many employees as the government of Puerto Rico, which has approximately 320,000 public employees. The blueprint for the government’s restructuring effort, known as Project Cornerstone, was led by the statewide private sector Florida Chamber of Commerce, and was successful in bringing a series of conferences and public forums to government, business, academic, and community leaders throughout the state. The objective was to develop a new consensus and model of state governance and economic development strategies based on Florida’s characteristics. Florida’s geographical size and economic diversity led to a consensus that a decentralized model of public administration and economic development, according to its economic regions (South, Central, and North), was preferred over the centralization of public functions in Tallahassee, the state’s capital. Florida’s cyclical economy–based primarily on tourism activities and construction–had severely impacted the state’s economic performance and fiscal finances during the 1990-1991 recession; therefore, an agreement was reached on the need to diversify the economy. The centralized departments of Commerce and Labor in Tallahassee were seen as incapable of delivering quick services to attract, retain, and expand wealth-creating enterprises while training the workforce needed by the private sector. The need and benefits of restructuring the workforce and economic development in a more dynamic public- and private-sector partnership was identified. "The old model of economic development is where the government would centralize its activities, but then the government in itself becomes an impediment because of the restrictions placed on the private sector," Villamil said. Based on the results of Project Cornerstone, a blueprint for action was debated and adopted through public meetings around the state. The consensus blueprint of 1996 led to the abolition of the Department of Commerce and the creation of public-private, nonprofit organizations with public and private boards of directors appointed by the governor, Senate president, and House speaker. The Labor Department was also restructured, leading to the creation of the Workforce Innovation Agency (WIA) in 2002. Funding for these entities would be through yearly state appropriations and business investments (either in cash or in-kind contributions). The Florida Legislature also created the Governor’s Office of Tourism, Trade & Economic Development (Otted) to oversee the performance-based yearly contracts with public and private organizations and to provide overall cohesion to the state’s economic development and workforce training effort. Enterprise Florida–the state’s principal public-private partnership–was created with the governor acting by statute as chairman and a vice-chairperson elected by the private sector. The Minority Business Board was also completely privatized with an initial capital investment of $2 million from the state. The board is currently running efficiently and assisting in the training and financing of minority entrepreneurs with funds from the federal government and private financial institutions. The Film & Entertainment Commission was also eliminated with regions and large municipalities throughout Florida now effectively carrying out most of the commission’s former activities of promoting the film and entertainment industries. A small division, headed by a Film Commissioner, remains at the state level under Otted for coordination purposes. The fiscal savings of the resulting model have been significant. In fiscal 1999, Otted had a budget of $150 million, down from about $200 million during the Commerce Department activities in fiscal 1996 (the last year the Commerce Department operated). In fiscal 2004, Otted’s budget to fund the public component of Enterprise Florida and other partnerships was $120 million. However, the figures for the Department of Commerce and Otted include close to $90 million in state fiscal incentives for employment-creating expansion in the private sector. Therefore, the operating budget for economic development has been reduced from about $110 million in 1996 to $60 million in 1999 and finally to $30 million at present. These fiscal savings have been accomplished by the decentralization of activities to regions and municipalities, through public-private partnerships that have streamlined workforce requirements, and private-sector financing support through yearly investments in the partnership under strict guidelines. For example, Enterprise Florida has about 50 investors (statewide companies) that provide a minimum of $50,000 to the entity. Clusters of innovation: North Carolina’s model The state of North Carolina, with a population of eight million, double the population of Puerto Rico, has pursued a public administration model and economic development strategy very different from Florida’s. North Carolina emphasized streamlining and decentralizing public functions but kept its major departments fully staffed. The Department of Commerce is at the center of both the economic and the human resources development drive of the state. The comprehensive activities of the department are supported by the Advisory Boards to the governor and to the secretary of Commerce. These boards are made up of public, private, and educational state leaders. They advise on policy and conduct research on strategy issues. The staff support comes from the Department of Commerce employees, who are often responsible for implementing the policies and strategies that the governor approves. In essence, the North Carolina model brings the private sector to facilitate and cooperate with the state functions, but the state retains full control over the delivery of public services. Utilizing the advisory and research services of the public-private boards, the state has diversified from significant reliance on labor-intensive manufacturing and tobacco during the 1960s to knowledge based industries. The "Clusters of Innovation" in the Research Triangle (RT) of North Carolina is the state’s primary economic strategy. This knowledge-based triangle encompasses the cities of Raleigh, Durham, Chapel Hill, and surrounding environs. The triangle is heavily supported by the top universities (Duke and the University of North Carolina) as well as key public-private entities at the local level. The Research & Technology Board of the state is the primary driving force in the RT’s continued development, in coordination with local organizations responsible for the expansion of the technology clusters within the Triangle region. As in the case of Florida, public and private sector cooperation between elected officials, business, universities, and community organizations has been essential to the success of technology-driven growth in the state and specifically in the RT region. Public administration in North Carolina has been primarily geared to facilitate the growth of the RT through state support with public-private Advisory Boards. The state support includes seed capital for new technology ventures, flexible zoning, and regulatory laws to foster clusters of innovation, and targeted human resources development programs. Furthermore, the Commerce Department has an active recruitment program for high technology and R&D organizations that have the potential for a presence in the RT and in the rest of North Carolina. North Carolina has also opted for a decentralized model of economic development through support for regional organizations and through the establishment of public-private advisory boards to the governor in key areas such as economic development, workforce development, and scientific and technology research. Under the model, the state retains both the Commerce and Labor departments as implementers of the strategies and policies recommended by the public-private advisory boards. Restructuring Puerto Rico’s public administration The WEG study demonstrates the importance of government restructuring to facilitate economic and human resources development. While Florida and North Carolina differ in the degree of governmental restructuring and size of the public sector, both have achieved positive results in terms of economic growth, business vitality, and workforce training in the face of a highly competitive global economic context. The two states’ models could be used as a starting point for fruitful debate and discussion on the future organizational structure and public administration practices in Puerto Rico. The study conducted for Agmus recognizes Puerto Rico has significant strengths to expand economic opportunities for its residents. "Puerto Rico has tremendous possibilities because it is bilingual, well-educated, residents are U.S. citizens, and it is the entry point from the Caribbean basin to the U.S. mainland, the largest economy in the world," stated Villamil, adding that Puerto Rico already has open access to mainland markets and, because the island is a part of the U.S., risks associated with investing in Puerto Rico are very low. "Puerto Rico also has the dollar currency and is covered by homeland security should it be necessary, so I see tremendous possibilities for the island," he added. The likely creation of the Free Trade of the Americas (FTAA) will place additional urgency in solving the challenges Puerto Rico is facing, according to WEG. Under the FTAA and other regional free trade agreements, such as the Central America Free Trade Agreement (Cafta), neighboring economies are streamlining governmental bureaucracies and aggressively promoting Foreign Direct Investment (FDI) from U.S. mainland-based corporations and multinationals. Trade and investment, away from Puerto Rico, is a possible outcome of the FTAA and other agreements, unless Puerto Rico restructures its public administration practices and develops economic development strategies to meet the challenge of trade integration, not only from the Americas but on a global basis. Villamil agrees there are many risks involved. "If things continue the way they are, people will continue to migrate from Puerto Rico. The risk also exists that the Free Trade Area of the Americas between countries in the Western Hemisphere will erode Puerto Rico’s advantages, so that unless Puerto Rico changes its model of economic development there will be more migration and more impoverishment of the island. So there is a sense of urgency. In other words, we have tremendous potential to change this; but there are downside risks for Puerto Rico if we don’t." The active and committed role of the private sector is essential for developing new models of public administration and economic development strategies. In Florida and North Carolina, the public sector works closely with the private sector. This facilitates the gathering of private-sector talent, know-how, and financial resources in partnership with the states’ governments. The WEG study suggests the Florida and North Carolina principles can also be applied to Puerto Rico for efficient restructuring of public administration. However, the specific model, in terms of the form, structure, and size of public functions, must be developed taking into account the unique economic, geographical, and demographic characteristics of Puerto Rico. In Puerto Rico, public discussions have emerged about the need to increase taxes to reduce the $1 billion deficit. Yet, reducing government, allowing the public sector to provide services, eliminating antiquated agencies, and increasing productivity haven’t been mentioned as part of the budget-reduction plan. Demanding higher productivity from public employees is necessary. Government services must be delivered with fewer costs and employees. The first step is to prepare studies, like the leadership Ana G. Méndez has taken in presenting a study like this, which can start a discussion, says Villamil. "That discussion has to have a positive objective, not a confrontational objective. Once that is done, you assign leaders from different sectors such as labor unions, universities, private and public sectors, chambers of commerce, and others to come together and start developing a consensus of a unique Puerto Rico model of economic development for the 21st century." Méndez of Agmus further added that once the debate he hopes this study will ignite begins, a list of further recommendations will be issued, based on the "best practices" findings that different states have implemented in their respective attempts at economic development. "It’s a process of transforming the economy to the 21st century where quick decision-making, less bureaucracy, streamlining permit processes for businesses, work. It has to be consensus-building, so everyone, including the labor unions, sees they will benefit from this because there will be more job opportunities, even if they are in the private sector rather than in the public sector." Florida and North Carolina are two examples, but they have to be tailored to the needs of the nation or state you are talking about, commented Villamil. "El Salvador has developed a new model and is doing very well economically. Chile has developed its own model and is also doing well, and Leonel Fernández in the Dominican Republic is trying to do the same but is just starting," he said. "A state or nation has to look at its own cultural situation and begin to move to having more flexible organizations, giving more power to the local entities, and allowing the private sector to grow. Jobs must be created in the private sector not the public sector." This is the only way the burden on Puerto Rico’s taxpayers will be alleviated and economic growth is stimulated. Carlos Márquez and Georgianne Ocasio Teissonniere contributed to this story. Number of State Residents Served per Public Employee Florida / North Carolina / Puerto Rico 1997: 78.2 / 60.7 / 12.1 2002: 86.5 / 59.7 / 13.1 Source: U.S. Bureau of Labor Statistics and WEG New Business Start-Ups Florida: 72,720 North Carolina: 22,950 Puerto Rico: 4,834 Source: U.S. Small Business Administration Venture Capital Investment In $Billions in 2000 Florida: 2.2 North Carolina: 1.8 Puerto Rico: 0.3 Source: Price WaterhouseCoopers Survey 2000 This Caribbean Business article appears courtesy of Casiano Communications. or
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